Is Unilever The Ultimate Retirement Share?

Will shares in Unilever help you build a FTSE-beating retirement fund?

The last five years have been tough for those in retirement. Portfolio valuations have been hammered and annuity rates have plunged. There's no sign of things improving anytime soon, either, as the eurozone and the UK economy look set to muddle through at best for some years to come.

A great way of protecting yourself from the downturn, however, is by building your retirement fund with shares of large, well-run companies that should grow their earnings steadily over the coming decades. Over time, such investments ought to result in rising dividends and inflation-beating capital growth.

In this series, I'm tracking down the UK large-caps that have the potential to beat the FTSE 100 (UKX) over the long term and support a lower-risk income-generating retirement fund (you can see the companies I've covered so far on this page).

Today, I'm going to take a look at Unilever (LSE: ULVR), one of the world's largest consumer goods companies, whose brands -- which include Cif, Dove, Hellmann's, Bertolli and Domestos -- we all use.

A Share To Hold Forever?

Unilever has a strong presence in emerging markets such as India. This has helped to fuel growth over the last decade. Let's take a look at how Unilever has performed against the FTSE 100 over the last 10 years:

Total Return

2007

2008

2009

2010

2011

Trailing 10 yr avg.

Unilever

35.8%

-13.4%

30.4%

2.0%

14.1%

10.4%

FTSE 100

7.4%

-28.3%

27.3%

12.6%

-2.2%

7.2%

Source: Morningstar

(Total return includes both changes to the share price and reinvested dividends. These two ingredients combined are what make it possible for equity portfolios to regularly outperform cash and bonds over the long term.)

Unilever has outperformed the FTSE 100 in four of the last five years, often by a large margin. This has contributed to its superior ten-year trailing average total return, which is a very healthy 10.4%.

What's The Score?

To help me pinpoint suitable investments, I like to score companies on key financial metrics that highlight the characteristics I look for in a retirement share. So how does Unilever shape up?

Item

Value

Year founded

1930*

Market cap

£63.5bn

Net debt

£8.4bn

Dividend Yield

3.4%

5 year average financials

Operating margin

14.8%

Interest cover

12.9x

EPS growth

15.7%

Dividend growth

7.4%

Dividend cover

2.1x

Source: Morningstar, Digital Look, Unilever

*Unilever was formed when several existing companies merged.

Here's how I've scored Unilever on each of these criteria:

Criteria

Comment

Score

Longevity

A long, successful history.

5/5

Performance vs. FTSE

FTSE-beating performance over the last decade.

5/5

Financial strength

Relatively high gearing is mitigated by strong, stable profit margins and good interest cover.

4/5

EPS growth

Attractive EPS growth should sustain future dividend increases.

3/5

Dividend growth

Unilever loses a point for cutting its dividends this year. Its yield is also below the FTSE average, although the potential for further growth compensates for this to some extent.

3/5

Total: 20/25

A score of 20/25 suggests that Unilever could be a good candidate for a retirement fund portfolio. Its huge range of consumer brands and emerging market footprint means that demand and growth opportunities for its products should remain strong for years to come, even in adverse economic conditions.

You can learn about Neil Woodford's top holdings and how he generates such fantastic profits in this free Motley Fool report. Many of Mr Woodford's choices look like excellent retirement shares to me and the report explains how he chose some of his biggest holdings.

No, the company hasn't cut its dividends this year. It's raised them, from 22.5 euro cents per quarter to 24.3 euro cents per quarter.

The trouble is instead that the euro has dropped significantly on the foreign exchange markets, leading to a decline in the sterling value of those dividends. I.e. a better reason for that point lost would be "Unilever loses a point for declaring its dividends in euros, so that the investor's sterling income is subject to exchange rate changes."

Elsewhere in this series of articles, by the way, HSBC and Shell have a similar issue: they declare their dividends in dollars and so the investor's sterling income is subject to dollar:sterling exchange rate changes. It's not as obvious because there haven't been major changes in that exchange rate for quite a few years, and the last time that there were, it was a strengthening of the dollar in mid 2008, leading to unusually big increases in Shell's sterling dividend rather than reductions to it - see http://www-static.shell.com/static/investor/downloads/dividend/dividend_history_q1_2012.xls (HSBC would be similar apart from the fact that it really did cut its declared dividend shortly afterwards). But there is certainly the same sort of risk for those two companies as for Unilever, just in a different currency that isn't currently suffering from the euro,s problems.

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